Time to quit renting? Ready for your own home? Want to upgrade to a larger home? Need to downsize for retirement? No matter your reasons for looking for a new home, the road ahead may seem complicated and unclear. Check out these 4 options to help pay for your new home.
NOW IS THE TIME TO BUY A HOME
If you’ve been on the fence, trying to decide whether or not it’s the right time to purchase a home, now may be a good time to buy. Here are some points to keep in mind:
- Mortgage rates remain well below 7% thanks to a weaker job market, falling stock prices, and economic uncertainty.
- The median U.S. home sale price sits at $426,000, near a record high and is continuing over 20 months of year-over-year gains.
- The market is active despite tariffs, inflation woes, and policy changes. Buyers are adapting to higher rates and rising prices, leveraging negotiating, and more sellers are listing their homes.
If you are ready to buy a home, here’s a look at four financing options.
CONVENTIONAL LOANS VERSUS FHA LOANS
Are FHA loans for first-time home buyers while conventional mortgages work better for more established buyers? Both types of loans have their pluses for both types of buyer. What it takes to qualify for each one is different.
Here are some aspects to take into consideration when looking at FHA loans versus conventional loans.
1. CONVENTIONAL LOANS
Conventional home loans are the most chosen route for most home buyers. These loans are fixed-rate loans that are made through a mortgage lender. If you choose this type of home loan, you can decide on the term for the mortgage. (Typical choices are 15 or 30 years, though some offer 20-year, 10-year, and other options as well.) Your monthly payment will never increase or decrease (though fluctuations will occur in your overall payment thanks to insurance and taxes).
Conventional loans are not insured by the federal government, meaning buyers must meet stricter guidelines to qualify. Typically, you’ll need at least 20% of the home’s value as a down payment to be eligible for a conventional loan. (It is possible to qualify if you have less than 20% down, but you’ll likely need to carry private mortgage insurance, an added fee to your monthly payment.)
Some conventional mortgages offer a slightly lower 3% down payment, but they typically require a credit score of 620 or higher.
WHAT’S THE DIFFERENCE BETWEEN 30-YEAR AND 15-YEAR MORTGAGES?
In a word, over the life of your loan, you’ll pay interest. How much interest will be determined by how long your loan is. For example, when you purchase a $300,000 home using a 30-year mortgage, put 20% down, and never pay extra towards your principal, you’ll spend over $230,000 in interest over the life of your mortgage. That same loan paid off through a 15-year mortgage (which also offers a lower interest rate) will cost you $85,000 in interest over the life of the loan. You’ll have higher monthly payments, but you’ll save tens of thousands in the long run.
While a 15-year mortgage will save you thousands in interest, a 30-year loan is the way to go if you’re looking for a lower monthly payment and a larger tax deduction.
2. FHA LOANS FOR FIRST-TIME HOME BUYERS
FHA loans are insured by the Federal Housing Administration, while conventional mortgages aren’t. These loans are designed specifically for first-time home buyers to make financing attainable. If you qualify, an FHA loan will allow you to buy a house with as little as 3.5% of the home’s value available as a down payment. You’ll need a credit score of about 580 or higher. (Lower credit scores may still be eligible for FHA loans with a higher down payment. Consult with a mortgage professional in your area.)
HOW TO GET FHA APPROVED:
You’ll need to visit the FHA website to find an approved lender and apply for an FHA loan.
Go over your finances. Typically, lenders will approve you for a monthly payment that is no more than 30% of your annual gross income. Your total overall debt is factored into this loan as well. If you have a lot of outstanding debt, consider paying this off before applying for an FHA loan.
Check your credit score with a website or app that won’t impact your score. If your credit score is less than 580, you’ll need to have a higher down payment. Knowing exactly how much you need to put down will avoid any unwanted surprises.
What is the downside of FHA loans?
They’re less attractive to sellers. If you find a home that has multiple offers, you’re less likely to win the bidding war. Plus, the mortgage protection insurance makes for a steeper monthly payment. If you have a 20% down payment, you’ll be able to pursue a conventional loan without the burdens of mortgage protection insurance.
What to Keep In Mind About Credit Scores for Conventional Loans and FHA Loans
Though the FHA sets minimum scores, lenders may require higher ones. And with both conventional loans and FHA loans, you’ll be more likely to qualify and be offered a better interest rate with a higher credit score.
3. FINANCING OPTIONS FOR VETERANS
This can serve as one of your financing options if you’ve served in the armed forces. If so, you’re eligible for a 0% down VA Loan, insured by the Department of Veteran Affairs (VA). Another great benefit? You can qualify for a VA Loan even if you’ve used it before. You are allowed to use this benefit over and over again, making home buying a much simpler process for veterans.
Unlike an FHA loan, lower down payments do not require you to carry private mortgage insurance. You can put down as much or as little as you’d like towards your down payment without penalty. You may still be required to pay a VA funding fee, which can roll into your overall mortgage.
WHAT YOU NEED TO KNOW ABOUT VA LOANS
The Department of Veterans’ Affairs (VA) has a loan program for eligible veterans, current servicemembers, and surviving spouses . The loans are made by private lenders and guaranteed by the VA.
Putting 0% down on a home means you’ll have a more substantial monthly payment. If you have money to put towards a down payment, it’s wise to do so and lower your overall monthly payment.
While you can use this benefit multiple times, restrictions apply. Check with your local VA-approved lender for specific details.
More specifics about VA loans:
- They often offer low-cost, streamlined refinance options and additional protections if you have trouble paying your mortgage later on
- This type of loan does not require monthly mortgage insurance premiums, but usually requires an upfront fee at closing
- Provides options for low or even zero down payments, but may be more expensive than conventional loans if you have significant down payment funds and good credit
The VA guarantee replaces mortgage insurance. More on mortgage insurance.
4. OTHER FINANCING OPTIONS
Conventional, FHA, and VA loans are the most popular lending programs for home buyers, but they’re not the only options out there. Here are a few others you might consider:
Adjustable Rate Mortgages. Your rate starts lower than conventional loans but rises annually after a period of time (usually 5-10 years). This is a popular option for borrowers with poor credit or home buyers who intend to move relatively soon.
USDA Loans. The US Department of Agriculture offers a similar program to the FHA and VA. Specifically designed for low and moderate income borrowers in rural areas, these loans can be a good option for borrowers who have little available savings. They offer a zero down payment and are usually cheaper than FHA loans. Borrowers will pay an upfront fee as well as ongoing mortgage insurance premiums to the USDA. Mortgage insurance is required by all USDA loans. Find out if you’re eligible
State and local programs. Many states, local governments, and nonprofits offer programs to make homeownership more affordable. Many of these programs focus on low and moderate income families buying their first home. Others may be available to families who have previously owned a home. Still other programs target teachers, firefighters, and other public service employees, or people interested in purchasing a home in a particular neighborhood.
DOWN PAYMENT ASSISTANCE
Many programs offer down payment assistance to use with a regular FHA or conventional loan. Some programs lend money directly through subsidized loans.
Think you might qualify? Explore programs in your area using this tool or contact a local housing counselor and discuss your options. Ask local lenders whether they offer any special programs. Mortgage insurance is required by many state and local programs.
Once you’ve decided which option is best for you, it’s time to get your financing in order. Check out several lenders, get recommendations from your real estate agent, and find a lender that works with your budget and your requests.
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David Miller is a licensed Associate Broker who loves to provide high-level service. Please let him know how he can serve you!
Cathi Castro is a licensed Realtor who loves to provide high-level service. Please let her know how she can serve you!